According to a PhocusWright report, US travelers spent nearly $23 billion on vacation rentals in 2012. Online booking of vacation rentals had increased from 12% in 2007 to 24% by 2012. The researcher estimated the online share of the market to grow to 30% by the year 2014. San Francisco-based AirBnB is a fast rising online player in the market and a strong IPO prospect for 2016 as well.
Airbnb was founded in 2007 by Rhode Island School of Design alumni, Joe Gebbia, and Brian Chesky, who lived in San Francisco and were struggling to pay their rent. The two decided to raise money by renting out their San Francisco apartment in October 2007 to local conference-goers. Within six days of releasing their first website, airbedandbreakfast.com, the partners found their first three renters who were willing to rent out their three airbeds on the living room floor. The success of the first rental inspired the two to set up the business.
The two joined hands with computer programmer Nathan Blecharczyk and designed their website. But the company still had very few rentals, most of which advertised airbeds. In its initial stage, VC investors weren’t too interested in the company because they believed that the market for airbed renting was too small. The founders had to resort to activities like selling limited edition cereal boxes to raise funds for their main business. The VCs were soon impressed by the founder’s desire to run the business, and gradually money began to come in.
The business wasn’t growing at a very fast pace though. By 2009, the company was still generating only about $200 per week in revenues. The founders soon realized that the reason for the dismal performance was the lackluster photographs put up by the property owners. Soon, they rented out a camera and replaced camera phone amateur images with high resolution images of the properties. The results were impressive as the pictures helped improve revenues grow to $400 per week within a week of replacing the photographs. It is simple ideas like these that helped Airbnb validate the founders’ initial hunch.
Today the site boasts of more than 2 million listings spread across more than 190 countries. Listings have grown from airbeds in living rooms to entire homes, villas, tree houses, and even castles. The site has helped more than 60 million guests book room nights through their site.
Airbnb earns revenues by charging both the property owner and the renter a commission on transactions conducted through their website. The property owner is charged a fee of 3% on the rental value and the renter is charged between 6-10% of the value.
It is still a privately held company and does not disclose detailed financials. But recent market reports suggest that its revenues for 2015 could reach $900 million. During the third quarter of 2015, AirBnB recorded $2.2 billion in bookings on which it earned $340 million in revenues. Revenues have grown from an estimated $250 million recorded in 2013. It is not profitable and expects to turn in profits by 2016. Analysts estimate it to turn in revenues of $10 billion by the year 2020.
Since the initial slow start, AirBnB has recovered significantly, and so has investor confidence. It has received $2.39 billion in venture capital and private equity from investors including Andreessen Horowitz, Ashton Kutcher, Baillie Gifford, China Broadband Capital, CrunchFund, Dragoneer Investment Group, DST Global, Elad Gil, Fidelity Investments, FirstMark Capital, Founders Fund, General Atlantic, Anton Levy, General Catalyst Partners, Joel Cutler, GGV Capital, Glenn Solomon, and Greylock Partners. Its last round of funding was held in November 2015 when it raised $100 million at a valuation of $25.5 billion. Its valuations have skyrocketed from $10 billion in August 2014 and $2.5 billion in 2013.
Given the current focus on a sharing economy, Airbnb definitely has enough room for growth. The company’s worries though lie in legal hurdles which it faces from several local governments that do not allow the renting out of residential space for commercial purposes. It has had to deal with several legal battles both within and outside the US. Despite those issues, I believe that Airbnb offers an impressive service and is a suitable candidate to go public. Whether or not it will be able to sustain the gargantuan valuations should become clearer when they submit their detailed financials for market review.
This segment is a part in the series : 2016 IPO Prospects